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Nicholas Magone

Licensed Mortgage Consultant

NMLS: 1657359

New Credit And How It Affects Your Credit Score

Your credit score matters in home loan approval and determining the rate you ultimately receive. Essentially, the higher the score, the lower the interest rate. That's why you must consider any action that might affect your score, such taking out new credit. Even a small loan can have a significant impact. If you're applying for a home loan within the next few months and considering taking out a loan or applying for new credit before then, you'll want to get the facts. 

Quick Overview: Why Your Credit Score Matters in Home Loan Approval

Lenders use your credit score as a sort of barometer for your financial credibility. The higher your score is, the more credible you are in the eyes of lenders.

There are five areas they look at:

  • Whether you pay your bills on time. 
  • The amount of credit you're using considering what's available to you.
  • The age of the earliest available credit.
  • The variety of credit you have like mortgages, student loans, and credit cards.
  • Your ability to get new credit.

There are two types of inquiries made when applying for new credit, soft and hard, and each of these impacts your credit in different ways.

A soft inquiry (sometimes called a soft pull) is primarily for educational purposes, such as when an employer conducts a background check, or you're getting preapproved for a home loan. This type of inquiry has no impact on your credit score.

A hard inquiry (or hard pull) happens when you're attempting to establish new credit, such as getting a mortgage, credit card, student loan, or car loan. A hard inquiry does impact your credit score and lowers it temporarily. 

How Much Will My Score Drop After A Hard Inquiry?

A typical hard inquiry can make your credit score drop by around 5 points per occurrence. Although this can seem like a huge dip, "new credit" only accounts for about 10% of your overall score, and it usually recovers in a couple of months. But if you're shopping around and applying for several loans "just to see if I get approved," the negative impact can start to add up and lower your score significantly.

"I Just Applied For A Loan. Can I Still Get A Mortgage?"

Hard inquiries will influence your credit score but not by an amount significant enough to disqualify you from getting approved for a home loan. If you've been on time with the rest of your bills and have been limiting your credit utilization, then the chances are excellent that you'll be approved for a low-interest rate home loan.

Unsure if there are steps you need to take before applying for a home loan? We can help! After a free consultation and a 360-degree view of your financial health, we'll let you know the fastest route for getting approved for a low-rate home loan.